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In this blog I and multiple commenters have broached the subject of the suspect constitutionality of PSPRS' replacement of the old perma...

Wednesday, September 12, 2012

The folly of the DROP, part three

For those who may remain unconvinced that the Deferred Retirement Option Plan (DROP) was a shortsighted and ill-conceived plan, here are some other points:

  1. The DROP existed for barely a decade before it was eliminated.  That is hardly a ringing endorsement of its financial genius.  Unfortunately, it will continue to harm PSPRS until the last of those grandfathered in finally leave the job.
  2. Though touted as a cost-neutral or even money-saving program, the DROP was only created for a small group of public safety personnel.  If it was so great, other departments would have created their own versions of the DROP.
  3. It creates a two-class system among PSPRS members.
To illustrate the last point, consider a new hire with no access to the DROP and an individual entering the DROP today with a very modest $3,000/month retirement benefit.  The employee who enters the DROP today, using the minimum interest rate of 2%, will receive a DROP payment after five years of $189,457.  At the current 4.4% interest rate, he would leave with $201,662.  This lump sum payment can then be rolled over into another tax-deferred account like an IRA or 457(b).

The new hire is ineligible for the DROP, but she can be extremely frugal and put away the current maximum $17,000 per year into her 457(b).  If she made regular monthly deposits of $1,417/month and earned a 4.4% interest rate, compounded monthly, it would take her over 9 years to save up about the same amount as the employee earning only 2% in the DROP.

The employee who entered the DROP would do nothing more than fill out some paperwork five years before he would have retired anyway.  But the new hire would have to make enormous sacrifices to achieve the same end.  She and her family would suffer, all while taking on the added burdens of working longer and paying more into PSPRS.  This is the folly of the DROP, personified.

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